With free land becoming scarce (and expensive) in Indonesia’s capital city of Jakarta, vertical infrastructure is the most efficient and lucrative strategy to engage in property business. Most of the new apartments that are currently under construction target Jakarta’s middle class segment that can afford to spend about IDR 200 to 500 million (USD $17,000 to 43,000) on an apartment. According to analysts there is no indication that a property bubble may arise in Indonesia. The main argument being that most new apartments (approximately 70 percent) is bought by end-users instead of speculative buyers.

In 2013 Indonesia’s central bank (Bank Indonesia) was concerned about the possibility of a property bubble as prices rose sharply. Therefore, the institution set new minimum down payment rules for second properties. The loan-to-value (LTV) ratio for the purchase of a second property was reduced to 60 percent and 50 percent for purchases beyond the second property, meaning that buyers need to pay a down payment of 40 percent for a second property and 50 percent for additional homes. Bank Indonesia also raised its benchmark interest rate (BI rate) gradually from 5.75 percent in June 2013 to 7.50 percent in November 2013. Although this move was primarily aimed at curbing the country’s current account deficit, support the rupiah and combat inflation, it also slowed the nation’s credit growth, including mortgages for the purchase of property.

Data from Colliers International Indonesia indicate that in 2015 the number of new apartments in Jakarta will rise by 18.98 percent to 24,954 units from 20,889 units in 2014. However, this growth of new apartments is lower compared to the 38.63 percentage point growth recorded in 2014. Slowing growth is caused by the slowing economy (including higher interest rates) as well as uncertainties brought about by the legislative and presidential elections that were held in 2014. Previous reports indicated that several property developers delayed projects that should have started in 2014.

Apartments in Jakarta:

 Year    New Apartments
  YoY Growth
 2015            24,854      +18.98%
 2014            20,889      +38.63%
 2013            15,068            -

Source: Colliers International Indonesia

The property developers mostly finance construction through internal cash reserves, pre-sales of the yet-to-be-built apartments and bank loans. Collier said that the average price of apartments in Jakarta was IDR 25.5 million (USD $2,179) per square meter in the second quarter of 2014, having increased 5 percent from the previous quarter, or, 16 percent compared to the second quarter in 2013. Based on region, prices in South Jakarta have climbed highest at 23 percent (year-on-year) in Q2-2014.

West Jakarta is currently the most popular location to construct vertical property. In 2015, 8,494 new units will be added to this region. The second-most popular region is North Jakarta where 6,382 new apartments will be added next year.

Demand for apartments in Jakarta is still high (evidenced by the fact that 70 percent of buyers are end-users). This is partly caused by people’s desire to live close to their offices. As traffic congestion is a serious problem in Jakarta, due to the lack of quality and quantity of infrastructure in combination with a growing population and increasing number of cars and motorcycles, people prefer to live inside the city rather than outside and spend more hours inside traffic.